China green car dream meets economic reality

HONG KONG China's campaign to bring cleaner, low-emission vehicles to its roads may take a back seat as the government seeks first to stimulate growth and counter dwindling sales in the world's largest car market.

Battery and car maker BYD Ltd (1211.HK) and other Chinese auto manufacturers with ambitions to be among the first globally to market all-electric vehicles are pinning their hopes on regulatory support to spur demand.

But creating an emission-free vehicle market for China is unlikely to be a priority. While China has made much progress in setting standards regulating vehicle emissions, it has not gone as far as providing incentives for individual buyers of the expensive, but low-polluting cars.

"I hope government subsidies can help boost demand, because this is good technology, though expensive compared to conventional cars," Henry Li, general manager for BYD's auto unit, said in an interview at the firm's Shenzhen headquarters.

China, the fastest growing major market for vehicles, is also the world's largest emitter of greenhouse gases.

Car sales growth in China, which overtook the United States in January to become the world's largest auto market, slowed to a single-digit rate in 2008 for the first time in at least 10 years as consumer confidence waned in a slowing economy, spurring government steps to bolster demand.

To lure buyers back into showrooms, Beijing in January unveiled a raft of policies including halving the auto purchase tax for cars with engine sizes below 1.6 liters. The government also scrapped some road fees and offered subsidies for farmers to boost demand for fuel-efficient vehicles in rural areas.

But given the high cost of developing hybrid and all-electric cars, automakers require more than the lifting of road fees and tax breaks to stimulate demand, experts said.

"There should be some incentives in place to convince consumers to switch to electric cars," said Sinling Chung, chief executive officer of Hong Kong-based EuAuto Technology Ltd, which recently began marketing a China-made microcar in Europe.

"There is also the issue of infrastructure. At some point car owners will need juice points where they can park and plug in the cars," said Chung in an interview at EuAuto's Shenzhen plant.

EuAuto plans to sell its two-door micro cars in China within three years, but has turned first to Europe, where subsidies for consumers help drive demand for electric cars.

HYBRID CARS

BYD started selling a plug-in electric hybrid car in December, called the F3 dual-mode or F3DM, which charges through a conventional home outlet and is supported by a small petrol engine. BYD, known for its cellphone batteries and famous investor, Warren Buffett, plans to roll out its all-electric car, the e6, later this year. That could make it the world's first commercially-distributed electric car.

More established Chinese carmakers have also been developing hybrid and all-electric cars.

Wuhu-based Chery Automobile built a hybrid model, the A5, and unveiled a prototype of its pure electric car, the S18 in February, while Shanghai General Motors Ltd, the 50-50 joint venture between General Motors Corp (GM.N) and SAIC Motor Corp (600104.SS), introduced the Buick LaCrosse Eco-hybrid in China last July.

The expensive cars, however, have not been flying out of showrooms.

BYD's F3DM sells at about 150,000 yuan ($21,935), which is 30-40 percent cheaper than Toyota's (7203.T) Prius in China. It is still double the cost of a comparable gasoline-powered car.

Toyota's Prius, whose battery stores energy from the engine to boost car power, sold 3,465 units from 2006 to 2008 in China -- fewer than expected, according to Daiwai analyst Ricon Xia.

Honda Motor Co (7267.T) put off plans to produce its hybrid model locally due to poor market response to its Hybrid Civic, Xia said, while Shanghai GM's LaCrosse sold less than 600 units in the second half of last year.

GREEN CAR PROGRAM

China stepped up its support of green vehicles in January, offering up to 500,000 yuan in subsidies for companies and agencies purchasing electric vehicles for fleet use.

While the move was seen as positive for makers of green cars, experts say it will do very little to create demand unless subsidies are extended to individual car buyers.

"Extending a subsidy to a mass market will be a powerful incentive, but requires a lot of money," said JP Morgan analyst Charles Guo.

"There may be some debate whether this is necessary, so it's unlikely for the program to be expanded near term," he said.

For now, Beijing is more focused on driving consolidation in its fragmented and overcrowded car industry.

Beijing is widely expected to soon issue a detailed plan allowing big state-run companies to take over smaller rivals.

"The most important thing for the government right now is to increase demand and restructure the sector, " said Vivien Chan, analyst with SinoPac Securities (Asia) Ltd. "Developing the green car segment is secondary to all the other objectives."

Next In China

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